If you’re starting a new company and have decided to form a limited liability company (LLC), you may have heard that some states have advantages when it comes to an LLC. This is true, but there are some things to know besides the advantages of certain states.
An LLC is a business entity that offers liability protection for owners, as well as pass-through taxation, much like a sole proprietorship.
3 Best States to Form an LLC
Delaware is considered a favorable state to form an LLC. Delaware does not tax out-of-state income, so if you do business in other states, there will be no Delaware state tax. There are also no fees to register your LLC and franchise taxes are low. Also, Delaware has the Chancery Court system, which allows businesses to settle disputes quickly. Finally, Delaware offers the greatest liability protection for members and reduced fiduciary duties, and has the most pro-business laws in the US.
Wyoming is also considered a top state for LLC formation. Wyoming has no state income or corporate tax, and no franchise taxes. It also has low LLC formation fees. Registering your LLC in Wyoming costs $100. The paperwork is minimal and no operating agreement is required. Wyoming is one of the few states that recognizes nonprofit LLCs and Series LLCs. A Series LLC allows for the segregation of members’ interests, assets, and operations into independent series. Each series is its own entity and can have its own finances. Wyoming also offers more liability and limited fiduciary duties for LLC members.
Nevada offers many advantages for LLCs. There is no state income tax for LLCs, no corporate or franchise taxes, and no personal state income tax. Nevada LLC filing fees are a bit higher, at $425, and they are annual filing fees as well. But the tax and other benefits outweigh this. Nevada also has strong liability and privacy protection, no operating agreement or annual meeting requirements, and very favorable business laws.
Should You Choose a State Other Than Your Own?
If you’re thinking of forming an LLC in a state that’s not currently your home state, you may only be doubling your paperwork and filing fees. This is because you will likely still need to register as a foreign LLC in your home state and be subject to its laws and taxes as well as those of the state in which you form your LLC.
This is true even if you merely base your business in your home state, but don’t do any sales there. This is because your business headquarters must be in the state where you live, whether you work from your home or not. Most state laws dictate that you must physically move to the state in which you form your LLC in order to avoid registering as a foreign LLC in your original home state.
A foreign LLC is simply an LLC doing business in a state other than the one in which it’s registered. For example, if your LLC is registered in Alabama but you also do business in Georgia, you’ll need to register a foreign LLC in Georgia.
If you have an LLC in your home state but do business in other states, you need to register as a foreign LLC in all of the states where you do business. Each state has different rules defining what doing business in their state means. Check with the secretary of state in any states where you may be doing business to see if you qualify. Generally, you are doing business in another state if:
- You have a physical presence of any kind in that state
- You have employees in that state
- You regularly meet with clients, managers, or investors in that state
- You are licensed to do business in that state
You also may be considered a foreign business if your business has a bank account or property in that state. However, if you’re an online business in one state and happen to make a lot of sales in other states, you’re probably not considered a foreign business and thus not required to register a foreign LLC.
Generally, it’s best to form your LLC in your home state. But a number of states, including those listed above, offer particular advantages. Before creating your LLC, however, it’s a good idea to speak to an accountant and an attorney to make sure you’re making the right choice for you and your business. Forming an LLC is a major entrepreneurial decision that should not be done without professional advice.
Once you’ve made your decision, forming an LLC is a simple process laid out in this Step By Step article on starting an LLC.
We recommended to read the following articles.